Citigroup is facing a make or break moment

REUTERS/Brendan McDermid
The Federal Reserve is about to release its annual bank stress test, and on Wall Street that means all eyes are on Citigroup.

Last year, the bank held the distinction of being the only major to fail the test, which is meant to evaluate how a bank will perform in the event of a crisis scenario. As a result, this year's passage or failure has turned from a routine headache into a make or break moment.

"The CEO's [Michael Corbat's] job is on the line with the stress tests," said CLSA analyst Mike Mayo. "This stress test has taken unusual importance... I'm literally planning my vacation around the stress test."

Failing means that shareholders are going to want to see a plan to actually grow the bank's business. And so far, Citi hasn't shown signs that one is in the works.

Over the last year since the bank failed, the stock has been basically flat, going from $47.98 when it failed last year to $49.44 now. For a stock that Mayo prices at $107, that's obviously no good.

Still he remains hopeful regardless of the test results. That's because what's at question for many analysts in this case is not what will happen to Citigroup — but how it will happen. They know that change has to come. The question is whether or not it will be forced to come about slowly, or whether the bank will make aggressive decisions on its own.

So lets examine the scenarios. Say the bank passes. Then it can engage in share buybacks ($1 billion a month, says Deutsche Bank), it can sell little pieces off — like its consumer finance unit — to raise cash. and dividend payments that will make shareholders happy for a time.

That would be an improvement on last year to be sure, but it would still be a lot like what the bank has been doing. Last year it announced that it would bow out of 11 countries around the world. The market yawned. This is what Mayo calls "death by 1,000 cuts" — small measures that will still ultimately lead to restructuring — and it isn't enough to make shareholders happy.

For long term change analysts want to see aggressive structural reform.

In either a pass or fail scenario without aggressive structural change "the bank is dead in the water," says analyst Chris Whalen of Kroll Bond Rating Agency.

"There's nothing that knits this business together to make sense," Whalen continued. "There's not a real catalyst here for a business model, and if I were in the boardroom I'd be thinking about how to break this thing up."

So what analysts will be looking for in the coming year is any sign that Citi's management has a plan for the bank, and a focus for its business. Its business has an odd mix. It tends to lend to lower, riskier retail clients than JP Morgan and Bank of America. Its branches are spread out. And the way Whalen sees it, the bank's offshore businesses are a loss leader.

"The model has clearly failed, but they're still here and The Fed does not have the ability to slam Citi into another bank."